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Bernanke flags end to US stimulus program

TANYA NOLAN: The world's most powerful central banker has declared that the economic emergency in the United States is nearing an end.

The chairman of the US Federal Reserve, Ben Bernanke has signalled that the unprecedented money printing program known as quantitative easing might be wound down by the end of the year.

But the message was enough to spook Wall Street with stocks suffering heavy losses.

The Australian dollar also dived and global investors moved their bets to a resurgent greenback.

Here's our business editor Peter Ryan.

PETER RYAN: Ben Bernanke has sent mixed signals in the past about the future of the Fed's money printing program and that's sparked confusion and major sell-offs in global markets.

But today his language was explicit.

Using a driving analogy, Dr Bernanke said the Fed's current bond buying of $85 billion a month might be about to go into reverse.

BEN BERNANKE: If the incoming data support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases.

PETER RYAN: The comments are being interpreted as Dr Bernanke coming out of the economic closet after weeks of speculation that the Fed was about to taper its money printing.

But speaking after the Fed's two day meeting, Dr Bernanke even flagged some rough dates.

A scaling back by the end of the year and maybe an end by mid-2014.

But these are qualified predictions - the big one being the US jobless rate which Dr Bernanke is betting will fall from the current 7.6 per cent to 6.5 per cent by next year.

BEN BERNANKE: Overall the committee believes the downside risks to the outlook for the economy and the labour market have diminished since the fall but we will continue to evaluate economic conditions and risks as they evolve.

PETER RYAN: So does that cautiously optimistic outlook mean US interest rates are about to rise from close to zero?

Using the driving analogy again, Ben Bernanke said although the Fed might be taking its foot off the accelerator later this year, it wouldn't be slamming on the brakes any time soon.

BEN BERNANKE: The economic conditions we have set out as preceding any future rate increase are thresholds, not triggers.

For example assuming that inflation is near our objective at that time as expected, a decline in the unemployment rate to 6.5 per cent would not lead automatically to an increase in the federal funds rate target but rather would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase.

PETER RYAN: After almost five years of crisis since the collapse of Lehman Brothers, you might expect some elation on Wall Street.

But instead of champagne, investors starting selling as soon as the Fed's statement hit.

The Dow closed 1.3 per cent weaker in what some see as an over-reaction to the prospect that an era of cheap and easy stimulus money is over.

Fund manager Cliff Noreen says Ben Bernanke's intention to slow the money printing should not have come as a shock.

CLIFF NOREEN: I think what he said was very logical. I think a lot of market participants forget that we've been having QE for four and a half years now so every quarter we have an update. This is just another update but it's been four and a half years, eventually this has to stop and they need to pull the throttle back on it so I think this is a natural comment by him and a natural reaction by the market.

PETER RYAN: The Australian share market followed the US lead and opened 1.3 per cent weaker.

BEN JARMAN: The Fed's been very careful to express this clearly. So in the past the issue has been that the Fed's tried to pull out of the QE programs and not made that conditional on the state of the world so markets have worried that essentially that they're tightening too soon.

Now he's been very clear this time around to make clear that if they do follow the plan and if they are tapering their QE and in effect and absolutely stopping that by mid-next year, then they'll only be doing that in a situation where the labour market is hitting its stride.

PETER RYAN: The better outlook for the United States pushed the greenback higher and that prompted a plunge in the Australian dollar - down 2.5 cents to a two year low of 92.62 US cents earlier this morning.

But JP Morgan's Ben Jarman doubts the dollar is in a permanent decline.

BEN JARMAN: Our official forecast at JP Morgan from our FX strategy team actually suggest it's going to go higher from here and that's really on the view that China, while there are risks around it, actually the talk around the downside is somewhat overdone.

PETER RYAN: But that China insulation theory is not necessarily reliable.

Factory production in China shrank at a faster pace this month, adding to signs that growth is weakening in the world's second biggest economy.

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